Warren Buffet on Gold:
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| Value Producing? |
“It has no utility.”
“The gold itself doesn’t produce anything.”
“Gold has two significant shortcomings, being neither of
much use nor procreative.”
Gold, silver, and collectibles all share two important
characteristics. They sit
passively. They represent an arbitrary
degree of stored valued. That’s it.
The stored value, denominated in a currency, fluctuates up
and down. However, none of these investments
ever creates additional value on its own.
Ever. Therein lies a major
problem.
If you invest in a precious metal or collectible you’re
effectively betting that any price you paid for it will be exceeded in the
future with a price offered by a buyer more desperate to own the item than
you. This is called market timing at
best (buy low, hope to sell high) and gambling at worst. However, I wouldn’t call it investing.
Dig in further and you may find as I did there are 6 Reasons
Dividend Stocks Beat Gold, Silver, and Collectibles.
1) Value Production: As noted above, a lump of gold or silver just
sits there. It doesn’t grow, multiply,
divide, conquer or anything else. If you
owned an ounce of gold at the beginning of time you would own an ounce of gold
at the end of time. That’s it. Between those points, you have to hope that somebody
is willing to pay a higher price for the chance to possess it than you did. As has been said many times before by
innumerable people – hope is not a strategy – and shouldn’t be the basis for
your financial future.
Companies with solid histories of dividend payments have
demonstrated through time they can produce value, increasing it as they
go. This fact becomes even more evident
with dividend paying companies that have raised their dividend payments on a
regular basis e.g., annually. Gold and
silver sit. Companies produce. Faced with choosing a sitter or a producer,
I’ll take the producer.
2) Storage: Storing a few hundred silver dollars requires
considerable, secured space. As of this
writing, a silver dollar from the early 1900s can run from $25 (circulated) to
$70 (uncirculated) and weigh roughly an ounce each. Therefore, if you owned $100,000 at $25 per
coin, you need to securely store 4,000 of them.
That’s about 250 pounds of metal sitting around your pad. You’ll need a big safe.
On the other hand, you can easily own $100,000 worth of
dividend paying stock, all of which is stored in your brokerage account. No safe and no armed guards required on your
part.
By the way, if you have to move your coin stash, you’ll find
it’s a lot more difficult to move hundreds of pounds of metal than change the
address with your broker to reflect a move for your dividend paying stocks.
3) Compound Annual
Growth: Precious metals and
collectibles do not produce compound returns.
You don’t start with one stamp, baseball card, or bar of silver and
after “x” years you have 2 of any of them.
However, as noted in 7 Reasons Dividend Stocks Beat Real Estate Investments,
the automatic investment of dividends produces additional shares of the
business for you. You can actually start
with 1 share of a dividend paying stock and after “x” years find yourself with
2 (or more!).
4) Insurance: If you own and store collectibles at home,
you should have insurance for them.
You’ll need to buy a sturdy safe.
You’ll also need to cough up money for the extra rider on your
homeowner’s insurance policy to protect you if your homestead burns to the
ground and melts your coins or turns your baseball cards to ash. The added cost of the insurance reduces your
“investment” return each year as you renew the insurance rider and pay the
premium. Since your precious metal
doesn’t inherently produce added value each year, it won’t take long for your
“investment” to be under water, figuratively speaking. And there's no insurance for that.
Conversely, if you own dividend paying stocks, your
investments are held and managed by the brokerage. No insurance rider required. Should your local broker’s building burn to
the ground, HQ retains the electronic records of your holdings and you’ll be
fine. Now, if all of Wall Street is
wiped out in a cataclysmic event, that’s a different story. In that case, finding food will be of greater
value than reconstituting your portfolio.
This scenario may be the one instance in which holding gold or silver at
home pays off for you. However, if
that’s what you’re planning for then you may want to consider investing in
firearms as well since you’ll need them to fight off the zombies while
protecting your gold.
5) Valuation: When it comes to things like coins or
collectibles, valuing them becomes difficult.
You have to know the different classifications and quality schemes
associated with each in order to assess their worth. For instance, you may need to regularly
consult a publication like Numismatic
News to decipher the value of your coins.
Even with a great pub like this, it’ll be difficult to get to the
bottom line, so to speak. I’m sure
similar conditions exist for stamps, baseball cards, and other
collectibles.
At least with gold and silver you can readily access per
ounce values through a number of public resources and the figures provided are
easy to gauge e.g., $16 is larger than $15 which is where silver may have been
the week before. Have fun generating a
similar conclusion with a San Francisco or Philadelphia minted coin from 1909
that may be Fair, Good, Excellent, Uncirculated, or of any number of other
conditions affecting the price a buyer is willing to pay for it.
Investing in dividend paying stocks offers investors a
bonanza of publicly available information through nearly unlimited channels
with which to value a company. On any
given day your broker or independent third-party sites like Yahoo Finance can
put nearly all the information you need to make an investment decision at your
fingertips. Do you need to know if a
company generated more money this year than last? Was it more profitable than its peers? Does it have a high debt to asset ratio? Even better, how long has it paid
dividends? How often or consistently
does it raise its dividend payment? All
these metrics are fairly objective, readily discovered, and digestible by
anyone with basic math skills allowing them to do a better job determining the
value of an investment than can be had with collectibles or precious metals.
6) Better
Performance: 1.02 vs 2.95…. That’s the compound annual growth rate for
gold vs the Dow Jones Industrial Average from February 1915 to February 2018
respectively. Both are indexed for
inflation during the respective periods.
Source: Macrotrends.
The numbers don’t look like much, but the rate of return on
a basket of stocks (producers) vs a basket of gold (a sitter) is nearly 3 to 1
over the past century. Truth be told I
couldn’t find a 100 year return on dividend paying stocks so I went with a
proxy. However, nearly half of all stock
investment returns are the result of dividends if you believe the folks at Hartford
Funds.
In other words, the dividends alone outperformed gold. Anecdotally speaking, my dividend paying
portfolio has realized a CAGR of 10.5% over the past 2 years while the CAGR for
gold has been a paltry minus .15% during the same period according to Macrotrends. I’m not sure about your math, but mine says
30 or 40 years at even 5% is far better than gold – or other precious metals
and collectibles for that matter.
Labour was the first
price, the original purchase – money that was paid for all things. It was not by gold or by silver, but by
labour, that wealth of the world was originally purchased. –Adam Smith
In short, producers produced before sitters could do
anything. That’s why Dividend Stocks
Beat Gold, Silver, and Collectibles.
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